Bureau of the Public Debt’s Fiscal Years 2010 and 2009 Schedules of Federal Debt pot

Highlights of GAO-11-52, a report to the Secretary of the Treasury In GAO’s opinion, BPD’s Schedules of Federal Debt for fi scal years 2010 and 2009 were fairly presented in all material

United States Government Accountability Offi ce

Highlights of GAO-11-52, a report to the

Secretary of the Treasury

In GAO’s opinion, BPD’s Schedules of Federal Debt for fi scal years 2010 and 2009 were fairly presented in all material respects, and BPD maintained effective internal control over fi nancial reporting relevant to the Schedule of Federal Debt as of September 30, 2010 GAO’s tests of BPD’s compliance with the statutory debt limit for fi scal year 2010 disclosed no instances of reportable noncompliance

As of September 30, 2010 and 2009, federal debt managed by BPD totaled about $13,551 billion and $11,898 billion, respectively Total gross federal debt outstanding increased over each of the last four fi scal years

2008, 2009, and 2010, legislation was enacted to raise the statutory debt limit

on fi ve different occasions During this period, the statutory debt limit went from $9,815 billion to its current level of $14,294 billion, an increase of 46 percent

GAO is required to audit the

consolidated fi nancial statements

of the U.S government Because

of the signifi cance of the federal

debt held by the public to the

governmentwide fi nancial

statements, GAO audits the

Bureau of the Public Debt’s

(BPD) Schedules of Federal Debt

annually to determine whether,

in all material respects, (1) the

schedules are reliable and (2) BPD

management maintained effective

internal control over fi nancial

reporting relevant to the Schedule

of Federal Debt Further, GAO

tests compliance with a signifi cant

provision of law related to the

Schedule of Federal Debt (statutory

debt limit)

Federal debt managed by BPD

consists of Treasury securities

held by the public and by certain

federal government accounts,

referred to as intragovernmental

debt holdings Debt held by the

public primarily represents the

amount the federal government has

borrowed to fi nance cumulative

cash defi cits Intragovernmental

debt holdings represent balances

of Treasury securities held by

federal government accounts,

primarily federal trust funds, that

typically have an obligation to

invest their excess annual receipts

(including interest earnings) over

disbursements in federal securities

For a fuller understanding of GAO’s opinion

on BPD’s fi scal years 2010 and 2009

Schedules of Federal Debt, readers should

refer to the complete audit report, available

by clicking on GAO-11-52, which includes

information on audit objectives, scope, and

methodology For more information, contact

Gary T Engel at (202) 512-3406 or

0 3,000 6,000 9,000 12,000 15,000

Intragovernmental holdings Held by the public Total

2010 2009

2008 2007

Opinion on the Schedules of Federal Debt 7

Compliance with a Selected Provision of Law 7

Overview, Schedules,

and Notes 11

Overview on Federal Debt Managed by the Bureau of the Public Debt 11

Appendixes

Appendix I: Management’s Report on Internal Control over Financial Reporting Relevant to the Schedule of Federal Debt 29Appendix II: Comments from the Bureau of the Public Debt 30Appendix III: GAO Contact and Staff Acknowledgments 31

United States Government Accountability Offi ce

Washington, DC 20548

November 8, 2010The Honorable Timothy F Geithner The Secretary of the TreasuryDear Mr Secretary:

The accompanying auditor’s report presents the results of our audits of the Schedules of Federal Debt Managed by the Bureau of the Public Debt for the fi scal years ended September 30, 2010 and 2009 The Schedules of Federal Debt present the beginning balances, increases and decreases, and ending balances for (1) Federal Debt Held by the Public and Intragovernmental Debt Holdings, (2) the related Accrued Interest Payables, and (3) the related Net Unamortized Premiums and Discounts managed

by the Department of the Treasury’s (Treasury) Bureau of the Public Debt (BPD).1

The auditor’s report contains our (1) unqualifi ed opinions on the Schedules

of Federal Debt for the fi scal years ended September 30, 2010 and 2009, (2) opinion that BPD maintained, in all material respects, effective internal control over fi nancial reporting relevant to the Schedule of Federal Debt

as of September 30, 2010, and (3) conclusion that our tests of BPD’s compliance with the statutory debt limit for fi scal year 2010 disclosed no instances of reportable noncompliance

As of September 30, 2010 and 2009, federal debt managed by BPD totaled about $13,551 billion and $11,898 billion, respectively, primarily for borrowings to fund the federal government’s operations As shown on the Schedules of Federal Debt, these balances consisted of approximately (1)

$9,023 billion as of September 30, 2010, and $7,552 billion as of September

30, 2009, of debt held by the public and (2) $4,528 billion as of September

30, 2010, and $4,346 billion as of September 30, 2009, of intragovernmental debt holdings

Debt held by the public primarily represents the amount the federal government has borrowed to fi nance cumulative cash defi cits To fi nance

a cash defi cit, the federal government borrows from the public When a cash surplus occurs, the annual excess funds can then be used to reduce

1 Intragovernmental Debt Holdings represent federal debt issued by BPD and held by certain federal government accounts, such as the Social Security and Medicare trust funds

debt held by the public In other words, annual cash defi cits or surpluses generally approximate the annual net change in the amount of federal government borrowing from the public

Intragovernmental debt holdings represent balances of Treasury securities held by federal government accounts, primarily federal trust funds, that typically have an obligation to invest their excess annual receipts (including interest earnings) over disbursements in federal securities Most federal trust funds invest in special U.S Treasury securities that are guaranteed for principal and interest by the full faith and credit of the U.S government The federal government uses the federal trust funds’ invested cash

surpluses to assist in funding other federal government operations The Treasury securities held by the federal government accounts are not shown

as balances on the federal government’s consolidated fi nancial statements because, under current U.S generally accepted accounting principles, they represent loans from one part of the federal government to another When the federal government’s fi nancial statements are consolidated, those offsetting balances are eliminated These securities are nonmarketable; however, they represent a priority call on future federal budgetary

resources

While both are important, debt held by the public and intragovernmental debt holdings are very different Debt held by the public approximates the federal government’s competition with other sectors in the credit markets Federal borrowing absorbs resources available for private investment and may put upward pressure on interest rates In addition, interest on debt held

by the public is paid in cash and represents a burden on current taxpayers

It refl ects the amount the federal government pays to its outside creditors

In contrast, intragovernmental debt holdings typically do not require cash payments from the current budget or represent a burden on the current economy In addition, from the perspective of the budget as a whole,

interest payments to federal government accounts by Treasury are entirely offset by the income received by such accounts This intragovernmental debt and related interest represent a claim on future resources and hence

a burden on future taxpayers and the future economy Specifi cally, when trust funds redeem Treasury securities to obtain cash to fund expenditures, Treasury usually borrows from the public to fi nance these redemptions Such borrowings result in competition for funds with the private sector and thus an effect on the economy.2

2 For more information, see GAO, Federal Debt: Answers to Frequently Asked Questions: An

Update, GAO-04-485SP (Washington, D.C.: August 12, 2004).

We have audited the Schedule of Federal Debt since fi scal year 1997

Over this period, total federal debt has increased by 151 percent During the last four fi scal years, managing the federal debt has been a challenge,

as evidenced by the growth of total federal debt by $5,058 billion, or 60 percent, from $8,493 billion as of September 30, 2006, to $13,551 billion as

of September 30, 2010 The increase to the federal debt became particularly acute with the onset of the recession in December 2007 Reduced federal revenues and federal government actions in response to both the fi nancial market crisis and the economic downturn added signifi cantly to the federal government’s borrowing needs And, due to the persistent effects of the recession, which ended in June 2009, federal fi nancing needs remain high

As a result, the increases to total federal debt over the past three fi scal years represent the largest dollar increases over a three year period in history The largest annual dollar increase occurred in fi scal year 2009 when total federal debt increased by $1,887 billion During fi scal year 2010, total federal debt increased by $1,653 billion Of the fi scal year 2010 increase, about

$1,471 billion was from the increase in debt held by the public and about

$182 billion was from the increase in intragovernmental debt holdings Treasury primarily utilized its existing suite of securities and increased or decreased auction sizes by security type as needed to fi nance the operations

of the federal government and to lengthen the average maturity of securities within its portfolio During fi scal years 2008, 2009, and 2010, legislation was enacted to raise the statutory debt limit on fi ve different occasions During this period, the statutory debt limit went from $9,815 billion to its current level of $14,294 billion, an increase of about 46 percent

Recovery from the economic downturn is expected to be slow during the next few years and as a result, defi cits are expected to remain high The Congressional Budget Offi ce (CBO) estimates the annual federal defi cit will

be just over $1 trillion for fi scal year 2011, down from $1.3 trillion for fi scal year 2010 Correspondingly, debt held by the public is expected to grow from an estimated 62.5 percent of gross domestic product (GDP) at the end

of fi scal year 2010 to over 66 percent of GDP at the end of fi scal year 2011 The real challenge is not this year’s defi cit or even next year’s; it is how best

to address the nation’s unsustainable long-term fi scal path over the coming decades

While considerable attention has been understandably given to the term fi scal position, the federal government faces even larger fi scal

near-challenges that will persist long after the return to economic growth

The budget and economic implications of the baby boom generation’s retirement have already become a factor in near-term budget projections and will only intensify as the baby boomers age Since fi scal year 2008, the

Medicare Hospital Insurance program has paid more in benefi ts than it receives in cash from payroll taxes For the fi rst time in over 25 years, the Social Security program, which has historically run large cash surpluses that helped reduce the need to borrow to fi nance other federal government activities, paid more in benefi ts than it received in tax income in fi scal year

2010 thereby contributing to borrowing needs GAO and CBO’s long-range

fi scal policy simulations continue to show that, absent signifi cant changes

in policy, the federal government’s fi scal condition over the coming decades

is on an unsustainable path The sooner action is taken to address this long-term fi scal challenge, the less disruptive and destabilizing the changes will be As a result, the nation’s leaders face the challenge of dealing with current economic and fi nancial issues in the context of the need to address the long-term fi scal challenges

A continuing trend that we have noted is the increase in reported foreign ownership of Treasury securities Treasury securities held by foreign and international investors have increased signifi cantly since 2001 According

to amounts reported in the September 2010 Treasury Bulletin, Treasury

estimates that the amount of Treasury securities held by foreign and

international investors has increased by $3,022 billion—from $983 billion3

as of June 30, 2001, to $4,005 billion as of June 30, 2010 As of June 30,

2010, this represents an estimated 46 percent of debt held by the public as compared to about 30 percent as of June 30, 2001

We are sending copies of this report to interested congressional

committees, the Commissioner of the Bureau of the Public Debt, the

Inspector General of the Department of the Treasury, the Acting Director

of the Offi ce of Management and Budget, and other agency offi cials In addition, this report is available at no charge on the GAO Web site at

http://www.gao.gov

If you have any questions concerning this report, please contact me at (202) 512-3406 or engelg@gao.gov Contact points for our Offi ces of Congressional

3 The June 30, 2001, estimated amount was previously reported in the Treasury Bulletin as

$1,001 billion and was subsequently revised to match the amount reported by the Treasury International Capital system.

Relations and Public Affairs may be found on the last page of this report GAO staff who made key contributions to this report are listed in appendix III.

United States Government Accountability Offi ce

Washington, DC 20548

To the Commissioner of the Bureau of the Public Debt

In connection with fulfi lling our requirement to audit the fi nancial statements of the U.S government, we have audited the Schedules of Federal Debt Managed by the Bureau of the Public Debt (BPD) because of the signifi cance of the federal debt to the federal government’s consolidated

fi nancial statements.1 This auditor’s report presents the results of our audits of the Schedules

of Federal Debt Managed by BPD for the fi scal years ended September

30, 2010 and 2009 The Schedules of Federal Debt present the beginning balances, increases and decreases, and ending balances for (1) Federal Debt Held by the Public and Intragovernmental Debt Holdings, (2) the related Accrued Interest Payables, and (3) the related Net Unamortized Premiums and Discounts managed by the Department of the Treasury’s BPD.2

In our audits of the Schedules of Federal Debt Managed by BPD for the

fi scal years ended September 30, 2010 and 2009, we foundthe Schedules of Federal Debt are presented fairly, in all material

• respects, in conformity with U.S generally accepted accounting principles;

BPD maintained, in all material respects, effective internal control

• over fi nancial reporting relevant to the Schedule of Federal Debt as of September 30, 2010; and

no reportable noncompliance in fi scal year 2010 with a selected

• provision of law we tested

The following sections discuss in more detail (1) these conclusions; (2) our conclusion on the Overview on Federal Debt Managed by the Bureau of the Public Debt; (3) our audit objectives, scope, and methodology; and (4) BPD’s comments on a draft of this report

1 31 U.S.C § 331(e) As a bureau within the Department of the Treasury, federal debt and related activity and balances are also signifi cant to the consolidated fi nancial statements of the Department of the Treasury (see 31 U.S.C § 3515).

2 Intragovernmental Debt Holdings represent federal debt issued by BPD and held by certain federal government accounts, such as the Social Security and Medicare trust funds.

The Schedules of Federal Debt including the accompanying notes present fairly, in all material respects, in conformity with U.S generally accepted accounting principles, the balances as of September 30, 2010, 2009, and 2008 for Federal Debt Managed by BPD; the related Accrued Interest Payables and Net Unamortized Premiums and Discounts; and the related increases and decreases for the fi scal years ended September 30, 2010 and 2009 BPD maintained, in all material respects, effective internal control over

fi nancial reporting relevant to the Schedule of Federal Debt as of September

30, 2010, that provided reasonable assurance that misstatements, losses, or noncompliance material in relation to the Schedule of Federal Debt would

be prevented or detected and corrected on a timely basis Our opinion on internal control is based on criteria established under

31 U.S.C § 3512(c),(d), commonly known as the Federal Managers’

Financial Integrity Act (FMFIA)

We identifi ed defi ciencies in BPD’s system of internal control that we consider not to be material weaknesses or signifi cant defi ciencies.3 We have communicated these matters to management and, where appropriate, will report on them separately

Our tests of BPD’s compliance with the statutory debt limit for fi scal year

2010 disclosed no instances of noncompliance that would be reportable under U.S generally accepted government auditing standards The objective

of our audit of the Schedule of Federal Debt for the fi scal year ended September 30, 2010, was not to provide an opinion on overall compliance with laws and regulations Accordingly, we do not express such an opinion BPD’s Overview on Federal Debt Managed by the Bureau of the Public Debt contains information, some of which is not directly related to the Schedules

of Federal Debt We did not audit and we do not express an opinion on this information However, we compared this information for consistency with the schedules and discussed the methods of measurement and presentation with BPD offi cials On the basis of this limited work, we found no material

3 A signifi cant defi ciency is a defi ciency, or combination of defi ciencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance A material weakness is a defi ciency, or a combination of defi ciencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s fi nancial statements will not be prevented, or detected and corrected on a timely basis A defi ciency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis.

inconsistencies with the schedules or U.S generally accepted accounting principles

BPD management is responsible for (1) preparing the Schedules of Federal Debt in conformity with U.S generally accepted accounting principles; (2) establishing and maintaining effective internal control over

fi nancial reporting, and evaluating its effectiveness; and (3) complying with applicable laws and regulations BPD management evaluated the effectiveness of BPD’s internal control over fi nancial reporting relevant

to the Schedule of Federal Debt as of September 30, 2010, based on the criteria established under FMFIA BPD management’s assertion based on its evaluation is included in appendix I

We are responsible for planning and performing the audit to obtain reasonable assurance and provide our opinion about whether (1) the Schedules of Federal Debt are presented fairly, in all material respects,

in conformity with U.S generally accepted accounting principles; and (2) BPD management maintained, in all material respects, effective internal control over fi nancial reporting relevant to the Schedule of Federal Debt as

of September 30, 2010 We are also responsible for (1) testing compliance with selected provisions of laws and regulations that have a direct and material effect on the Schedule of Federal Debt; and (2) performing limited procedures with respect to certain other information accompanying the Schedules of Federal Debt

In order to fulfi ll these responsibilities, we examined, on a test basis, evidence supporting the amounts and

• disclosures in the Schedules of Federal Debt;

assessed the accounting principles used and any signifi cant estimates

• made by management;

evaluated the overall presentation of the Schedules of Federal Debt;

• obtained an understanding of the entity and its operations, including

• its internal control over fi nancial reporting relevant to the Schedule of Federal Debt;

considered BPD’s process for evaluating and reporting on internal

• control over fi nancial reporting relevant to the Schedule of Federal Debt based on the criteria established under FMFIA;

Objectives, Scope,

and Methodology

assessed the risk that a material misstatement exists in the Schedule

•

of Federal Debt and the risk that a material weakness exists in internal control over fi nancial reporting relevant to the Schedule of Federal Debt; evaluated the design and operating effectiveness of internal control over

performed such other procedures as we considered necessary in the

•

circumstances

Internal control over fi nancial reporting relevant to the Schedule of Federal Debt is a process effected by those charged with governance, management, and other personnel, the objectives of which are to provide reasonable assurance that (1) transactions are properly recorded, processed, and summarized to permit the preparation of the Schedule of Federal Debt

in accordance with U.S generally accepted accounting principles; and (2) transactions related to the Schedule of Federal Debt are executed in accordance with laws governing the use of budget authority and other laws and regulations that could have a direct and material effect on the Schedule

of Federal Debt

We did not evaluate all internal controls relevant to operating objectives

as broadly established under FMFIA, such as those controls relevant to preparing statistical reports and ensuring effi cient operations We limited our internal control testing to testing controls over fi nancial reporting Our internal control testing was for the purpose of expressing an opinion on the effectiveness of internal control over fi nancial reporting and may not be suffi cient for other purposes Consequently, our audit may not identify all defi ciencies in internal control over fi nancial reporting that are less severe than a material weakness Because of inherent limitations, internal control may not prevent or detect and correct misstatements due to error or fraud, losses, or noncompliance We also caution that projecting any evaluation

of effectiveness to future periods is subject to the risk that controls may

become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We did not test compliance with all laws and regulations applicable to BPD

We limited our tests of compliance to a selected provision of law that has a direct and material effect on the Schedule of Federal Debt for the fi scal year ended September 30, 2010 We caution that noncompliance may occur and not be detected by these tests and that such testing may not be suffi cient for other purposes

We performed our audit in accordance with U.S generally accepted government auditing standards We believe our audit provides a reasonable basis for our opinions and other conclusions

In commenting on a draft of this report, BPD concurred with the conclusions in our report The comments are reprinted in appendix II

Gary T EngelDirector Financial Management and Assurance

November 1, 2010Agency Comments

Overview on Federal Debt Managed by the Bureau of the Public Debt

Overview, Schedules, and Notes

Overview on Federal Debt Managed by the Bureau of the Public Debt

Federal debt managed by the Bureau of the Public Debt (BPD) comprises debt held by the public and debt held by certain federal government accounts (under 31 U.S.C § 3101), the latter of which is referred to as intragovernmental debt holdings As of September 30, 2010 and 2009, outstanding gross federal debt managed by the bureau totaled $13,551 and $11,898 billion, respectively The increase in gross federal debt of $1,653 billion during fiscal year 2010 was due to an increase in gross intragovernmental debt holdings of $182 billion and an increase in gross debt held by the public of $1,471 billion As Figure 1 illustrates, both intragovernmental debt holdings and debt held by the public have increased since fiscal year 2006 The primary reason for the increases in intragovernmental debt holdings is the excess annual receipts (including interest earnings) over disbursements in the Federal Old-Age and Survivors Insurance Trust Fund, Civil Service Retirement and Disability Fund, Federal Supplementary Medical Insurance Trust Fund, Military Retirement Fund, and DOD Medicare-Eligible Retiree Health Care Fund The increases in debt held by the public are due primarily to total federal spending exceeding total federal revenues

As of September 30, 2010, gross debt held by the public totaled $9,023 billion and gross intragovernmental debt holdings totaled

$4,528 billion

1 Federal debt outstanding reported here differs from the amount reported in the Financial Report of the United States Government because of the securities not maintained or reported by the bureau and which are issued by the Federal Financing Bank and other specific securities issued outside of the authority of Title 31, U.S Code, section 3101

Interest Expense

Interest expense incurred during fiscal year 2010 consists of (1) interest accrued and paid on debt held by the public or credited to

accounts holding intragovernmental debt during the fiscal year, (2) interest accrued during the fiscal year, but not yet paid on debt

held by the public or credited to accounts holding intragovernmental debt, and (3) net amortization of premiums and discounts

The primary components of interest expense are interest paid on the debt held by the public and interest credited to federal

government trust funds and other federal government accounts that hold Treasury securities The interest paid on the debt held by

the public affects the current spending of the federal government and represents the burden in servicing its debt (i.e., payments to

outside creditors) Interest credited to federal government trust funds and other federal government accounts, on the other hand,

does not result in an immediate outlay of the Federal Government because one part of the government pays the interest and

another part receives it However, this interest represents a claim on future budgetary resources and hence an obligation on future

taxpayers This interest, when reinvested by the trust funds and other federal government accounts, is included in the programs’

excess funds not currently needed in operations, which are invested in federal securities For fiscal year 2010, interest expense

incurred totaled $413 billion, interest expense on debt held by the public was $215 billion, and $198 billion was interest incurred

for intragovernmental debt holdings As Figure 2 illustrates, total interest expense has increased from fiscal years 2006 through

2008 However, due to the economic conditions, there was a significant increase in the demand for government backed securities

during fiscal year 2009, which resulted in lower average interest rates and interest expense for that year For example, the average

interest rates on Treasury bills outstanding as of September 30, 2009 and 2008 were 0.3 percent and 1.6 percent, respectively

While the interest rates on Treasury bills have remained relatively steady for fiscal years 2009 and 2010, interest expense has

increased due primarily to an increase in Treasury notes and bonds outstanding, which have higher average interest rates than

Treasury bills Average interest rates on principal balances outstanding as of September 30, 2010 and 2009, are disclosed in the

Notes to the Schedules of Federal Debt

Debt Held by the Public

Debt held by the public primarily represents the amount the Federal Government has borrowed to finance cumulative

cash deficits During fiscal year 2010, Treasury implemented several important components as a debt management

strategy, which affected the mix of outstanding Treasury securities Treasury bills decreased by $202 billion; whereas,

Treasury notes and bonds increased by $1,480 billion and $169 billion, respectively, in fiscal year 2010 As of

September 30, 2010 and 2009, gross debt held by the public totaled $9,023 billion and $7,552 billion, respectively (see

Figure 1), an increase of $1,471 billion This increase was primarily the result of borrowings needed to finance the

government's fiscal year 2010 deficit However, as a result of most of the increase in outstanding gross debt held by the

public being in the form of longer term securities, the total dollar amount of activity for both borrowings and

repayments of debt held by the public decreased for fiscal year 2010

As of September 30, 2010, $8,476 billion, or 94 percent, of the securities that constitute debt held by the public were

marketable, meaning that once the Federal Government issues them, they can be resold by whoever owns them Marketable

debt is made up of Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protected Securities (TIPS) with

maturity dates ranging from less than 1 year out to 30 years Of the marketable securities currently held by the public as of

September 30, 2010, $5,180 billion, or 61 percent, will mature within the next 4 years (see Figure 3) As of September 30,

2010 and 2009, notes and TIPS held by the public maturing within the next 10 years totaled $5,673 billion and $4,169

billion, respectively, an increase of $1,504 billion

Debt Held by the Public, cont

The Federal Government also issues to the public nonmarketable securities, which cannot be resold, and have maturity dates

from on demand out to 40 years As of September 30, 2010, nonmarketable securities totaled $547 billion, or 6 percent of

debt held by the public As of that date, nonmarketable securities primarily consisted of savings securities totaling $189

billion, State and Local Government Series securities totaling $193 billion, and Government Account Series securities

totaling $129 billion

The Federal Reserve Banks (FRBs) act as fiscal agents for Treasury, as permitted by the Federal Reserve Act As fiscal

agents for Treasury, the FRBs play a significant role in the processing of marketable book-entry securities and paper U.S

savings bonds For marketable book-entry securities, selected FRBs receive bids; issue book-entry securities to awarded

bidders and collect payments on behalf of Treasury; and make interest and redemption payments from Treasury’s account to

the accounts of security holders For paper U.S savings bonds, selected FRBs sell, print, and deliver savings bonds; redeem

savings bonds; and handle the related transfers of cash